Changing of the Guard in the Australian Industrial Investment Market

2011-06-24T05:00:00Z

Research Report outlines key market trends – consolidation and rationalisation in the industrial sector and changing investor profile, increase in offshore investment, thinnest development pipeline in a decade and outlook for rents and values

AUSTRALIA, 24 JUNE 2011 - An analysis of investment trends in the national industrial market has revealed a changing of the guard in the investor profile, as investors re-weight their property portfolios following the GFC and new entrants come into the sector.

A new research report by Jones Lang LaSalle, entitled ‘Industrial Investment Market Themes’ examines the key themes of 2010 that are now being played out in 2011.

The report states that the changing investor profile in the Australian industrial market has been due to the consolidation and rationalisation in the sector, with a number of funds selling down their assets while existing and new entrants are filling their place.

Australian Head of Industrial at Jones Lang LaSalle, Michael Fenton said a steady flow of assets during 2011 would be the result of this rationalisation.

“The consolidation experienced in the industrial sector has resulted in greater concentration in institutional ownership at the top end by funds looking to increase their focus on industrial.

“Funds that have sold or are currently selling down industrial property include ING, Colonial, AMP, PIF, Stockland, Cromwell, Brookfield and Salta Properties. Existing and new entrants are now filling their place. Large industrial landlords are stepping up to increase their scale in the industrial sector. These include DEXUS, Charter Hall, Lend Lease and Goodman. These funds have identified industrial property as part of their core mandate.

“New domestic entrants such as Altis and Growthpoint have emerged as key players in the industrial market, competing with offshore mandates (such as Aviva and GIC) and larger domestic funds to grow their presence in Australia.

“What we are seeing is a strategic sell-down of industrial sector assets by large players, while at the same time a strategic build-up of assets by players who are underweight in the industrial sector.

“A prime example of this was the strategic sell-down by Colonial First State Global Asset Management in October 2010, through the $231 million portfolio sale of the industrial holdings of Direct Property Investment Fund (DPIF). This was acquired by DEXUS Wholesale Property Fund – a strategic build-up to increase their exposure to industrial property.

“We expect increasing competition for assets going forward, as over the next 12-18 months institutional investors re-weight or unwind their industrial holdings. This will see a steady flow of assets coming to the market. Not all of these will be prime investment grade, allowing smaller and opportunistic investors to participate in the market restructuring,” Mr Fenton said.

Buyer/Seller Profile in 2010

Private investors remained the most active purchasers of industrial property in 2010, at 34%, while property developers were the most active sellers at 22%. Unlisted funds accounted for 19% of all purchases in 2010 (and 20% of sales), while private investors made up 20% of all sales.

In 2008 and 2009, industrial investment purchases were dominated by private individuals and property companies. During this time, listed and unlisted domestic funds were net sellers of property assets, looking to sell down non-core property to reduce debt.

In contrast, in 2010, private buyers had a reduced appetite for property (34% of purchases by value and 20% of sales).

Mr Fenton said, “2010 marked the return of the institutional investors as a purchaser of industrial property. Private firms still dominate the market, but compared to 2008/09, there has certainly been more activity by unlisted funds and other groups.

“Offshore investors made their presence felt in the direct industrial investment market for the first time in 2010,” Mr Fenton said.

East Coast focus persists

Mr Fenton said East Coast cities remain the preferred markets by most major domestic investors and new offshore entrants. Sydney and Melbourne are the most sought after, followed by Brisbane.

Despite this East Coast focus, industrial property sales in Perth increased during 2010 and accounted for a large share of sales nationally (18%). Perth rents and values have rebounded strongly since 2009 and the prospects for growth in Perth are becoming more widely recognised, making it an attractive investment destination.

Market Fundamentals – Outlook for Rents, Values and Supply in 2011:

Director, Industrial Research, Nick Crothers said, “We see market fundamentals in the next 18 months being supportive of further growth in investment in the industrial sector in Australia.”

“Yields firmed further in 2010, after tightening significantly at the latter half of 2009, leading to a solid rise in capital values

“Investor sentiment remains positive, with renewed interest in the industrial sector from established market participants as well as new entrants looking to ‘get set’ in 2011.

“Therefore, we expect solid competition for prime-grade assets in the next two years to continue to put downward pressure on yields. The majority of the future yield tightening is expected to occur in the remainder of 2011 and 2012. Future yield compression is expected to be limited by the cost of capital and rising interest rates,” said Mr Crothers.

Nationally, the new supply constructed in 2010 was the lowest in a decade: the supply pipeline for the remainder of 2011 looks relatively subdued.

“However, new construction is starting to pick up due to pre-lease and D&C activity through 2010.

“Occupier demand has improved, lead by large firms in the retail and logistics industries. Leasing activity in existing stock also increased at the end of 2010 and early in 2011, indicating a growing willingness by small to medium businesses to enter the leasing market.

“Rents increased in most markets, with a strong bounce in some markets that are more supply constrained, and growth was not limited to prime grade space.

“Increasing occupier demand and low levels of supply are expected to result in further rental growth in 2011 and beyond. This will encourage investors and developers in the industrial sector looking to deploy capital,” said Mr Crothers.